Except for 5 U.S. companies, May would have looked just like February in the chart below – a column of red. Except for what is now called the AI complex: the five companies with leading edge artificial intelligence software and hardware (Apple, Microsoft, NVIDIA, Meta Platforms and Alphabet), May was a difficult month. It is possible, likely even, that AI will be one of the biggest transformative technological developments in history. If so, it is equally likely that much of the AI complex is over-valued today but undervalued long term. Will the AI complex continue its skyward trajectory – probably not. But, as I wrote in a Morning Note a few days ago; forecasting when it will happen is a lot harder than saying if it will happen.
From an economics perspective, the divergence between the service and manufacturing sectors widened in May, in developed markets around the world. It is painting a mixed picture of the global economy. Manufacturing PMI’s (Purchasing Manager’s Index) across the board are well below 50, signaling contraction. Contrarily, services PMI’s came in just above 50 across the board, signaling expansion. It is confusing. Core inflation has remained stubbornly high and the prospect of sustained wage growth has fueled concerns that central banks could tighten further, leaving peak policy rates higher than recently expected.
The debt ceiling impasse generated negative headlines all month. Despite the drama and because of the AI complex, equities were relatively resilient with the S&P 500 rising by 0.4%. Commodities had their worst month of the year so far, which has to be good for the inflation picture. Bonds also had a tough month having to adjust to the possibility of higher peak cycle rates.
Looking ahead, I think the biggest risk to stock prices is not a recession. It is inflation. The Fed has said as much, as well. The stock market seems to be in Missouri mode – show me. It looks like it will remain buoyant until it sees higher rates and/or the teeth of an actual recession and its commensurate earnings contraction. Since the evidence of a recession continues to slowly grow month by month, we’ll just have to wait to be rewarded for our cautious posture. Let’s hope its name is not Godot.
Be well,
Mike
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